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Consolidation of Payment Rails

24 January 2019

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Visa’s planned acquisition of Earthport is the latest in a recent series of consolidations in the global payment systems sector, following in the wake of MasterCard’s purchase of UK operator VocaLink and Worldline’s purchase of the Swiss operator SIX Payments
Services.

For the two major credit card companies it is a move into handling payment transactions that are simply from one account to another. Historically their flows have been from consumer to merchant, as in the case of SIX Payments. The move to business-to-business
(B2B) payments is growing rapidly: Visa notes that B2B is growing at 12% a year as companies became more global thanks to e-commerce. Visa’s B2B business now makes up 11% of its revenue.

Internationally, each country has its own set of payment systems to move money within the country. For international payments banks created
Swift to provide standards and move the payment instruction messages. In early 2017, Swift, working with the banks, launched its Global Payment Innovation (GPI) initiative to accelerate international
payments and give visibility of their progress. Under GPI more than 50% of payments are credited to end beneficiaries within 30 minutes, and almost 100% of payments within 24 hours.

In 2018, Swift traffic grew 11.4%, to a total of 11.9 billion messages, with GPI now accounting for more than half of that. It is this move to same day (faster payments) that people and corporates want. After all, don’t we all want to be paid now and not
sometime in the future!

The new payment rails being introduced in more than 40 countries are for real-time movement of payments. Looking who are building these systems, Swift and VocaLink predominate. An alternative to a new system is to use the existing rails and coordinate the
payment activities so international payments can be made in that time zone. Either today (T) or tomorrow (T+1) which is the Earthport model.

The rapid movement away from cash to contactless payments is providing rapidly increasing volume to the rails. The UK ranked the highest country in the combined European Union with
€108 trillion cashless payments usage in 2018. The UK saw the use of cash fall by 15%.

The ownership of the in-country domestic payment rails is usually the local banks with their regulatory bodies. But Technology has given consumers and businesses access to goods and services from anywhere. Now global, seamless payment services are needed.

It is back to the Future: MasterCard and Visa started under US bank ownership in California and are both now public quoted companies. Logos, like those of Apple and Nike are recognisable without the brand name. In 1875, The Bass Brewery, which like most
breweries has been consolidated more than once, is the first company to be recognised by a nameless logo: the red triangle was the first trade mark to be registered in the UK. Mastercard has now joined them by dropping its name from the logo as 80% of us recognise
the logo without the name.

With revenues from two sources – the payment message and foreign exchange fees – and with double digit growth in volume, the international payments market looks attractive. The move from local, next day payments to real time, international connected infrastructures
is becoming a reality. The banks, who often were forced into consortium-owned rails, now have a valuable asset. The drive by consumers, SMEs and corporates for safe, transparent, trackable and fast payments is palpable. Consolidation of payment rails looks
set to continue.

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Comments: (4)

The €108trillion figure is cashless not contactless (easy slip). €108tn relates to a UK GDP of about €2.5tn. Put it in context, that's €18m of payments per inhabitant of the UK. That's still quite a lot.

I think the mastercard acquisition of Vocalink was very timely and focussed. The Earthport acquisition may be as well, but it relies on control of remote accounts for the most part and I'm therefore not clear these are rails, more bogeys. In any case, schemes
should spend money while they have it, anticipating that the golden years are coming to an end for the cards market.

We should, of course, keep an eye on concentration of risk in a few providers. After the Visa outage last year,it's clear s

Despite a bewildering proliferation of digital payments over the past 10 years, the old payment champions Visa & MasterCard continue to be the new payment champions because most "new ways to pay for things still lead back to Visa and Mastercard".

Jonathan - many thanks and losing 15% of cash usage in 12 months is impressive. Given that the tipping point where small changes lead to significant and important event, is regarded at 33%, the cashless society is not far off.

The major credit card leaders are moving away from their traditional business model and into account to account movement. This is the transaction banking model.

Earthport is using the existing payment structure in 86 countries to provide international payments that settle usually within 24 hours. Given that international payments take so long to settle and clear today is archaic and out of synch with today's digital
society.

Managing the risks is the providence of the incountry Central Bank and the Government. Each country has a different set of rules and requirements. Not to comply could mean all accounts held within that country could be suspended. By acquiring payment infrastructure
often comes with the approval of the local regulatory.